The Cost Impact of Hurricane Harvey on The Texas Construction Market

Posted By: | Category: BlogCost and Risk Management
MGAC Hurricane Harvey Construction Impact Texas Construction Market Austin San Antonio Hurricane Irma California Wildfires Cost Escalation

Our Cost + Risk team has been providing cost management services on a new planned civic building in San Antonio, Texas since 2014. Between then and June 2017, we worked with the owner and design team to refine the project scope and create a design concept that aligned with the estimated cost of construction.

When Hurricane Harvey hit the Texas Gulf Coast in August this year, the owner was understandably concerned with how the bidding climate in the already saturated market would be affected. Our team was tasked with analyzing the potential impact it would have on construction costs in the San Antonio/Austin region, and specifically what the likely impact would be on their project at its time of bid, which is planned for early 2018.

MGAC Hurricane Harvey Construction Cost Impact Texas San Antonio Austin Hurricane Irma

Our Methodology

Because the hurricane is such a recent event, few indices have released data to account for the impact of the disaster. In order to assess the cost impact of the hurricane with limited data availability, we interviewed local general contractors, subcontractors, vendors, labor unions, and the AGC to gain directional insights into the construction market over the next 18 months. This has helped us identify specific labor and material issues and risks across all major trades.

We also studied the case of Hurricane Katrina as a benchmark to gauge the potential magnitude of cost impact. Katrina is a relevant comparable for our analysis because preliminary estimates suggest that the economic impact Harvey has caused is second only to Katrina, with the potential to exceed it. Hurricane Katrina also shares another similarity with Harvey, having made its landfall in a region that had a robust and expanding construction market, much like current conditions in South Texas.

Our Findings

Rebuilding work following a natural disaster typically lags by a period of time due to the process of removing of damaged property, general clean-up, processing of insurance claims, return of evacuated people, and the mobilization time required for the construction industry to adjust to the sudden increase in work volume. Harvey is expected to begin influencing construction starts in the region beginning in early 2018 and progressing through 2019.

The demand for skilled labor in general and certain materials will increase because of the numerous competing needs throughout the region. The San Antonio region for instance, is currently experiencing a construction boom across the residential, commercial, and public sectors. In San Antonio alone, we are tracking nine major private developments in the pipeline, each with an estimated cost above $50 million, in addition to a number of public projects worth several billion already well underway.

Specifically, our research found that these factors are likely to result in:

  • Potential Labor Cost Increase of 10%: Labor shortage has been an ongoing issue across Texas, and is likely to be exacerbated by Hurricane Harvey. The upsurge in demand around the Houston area is expected to push up local labor prices, drawing the workforce from surrounding areas to Houston and causing price increases in those surrounding areas. Such workforce migration is already happening according to our interviews with local contractors. Data from Hurricane Katrina showed a similar trend, with an average labor cost increase of 10% in three metro areas surrounding New Orleans 1.5 years after the storm.
  • Material Cost Increases For Specific Materials: Although the hurricane will affect the construction materials market in general, most of the rebuilding work will occur in the residential and commercial sectors. This is expected to primarily impact the cost of materials like lumber, plywood, sheathing, gypsum wallboard, plastics, and copper.
  • Risk of Non-Competitive Bidding: In a busy market with abundant work but limited resources, there is always the risk that bids will be higher than expected because reduced competition among bidders allows contractors to charge a higher premium. A study has found that after Hurricane Katrina, the statewide bid index for federal highway projects jumped by 24% within 3 quarters following the storm, and then stabilized. In addition, the average number of bidders per project declined from 3.5 to 3, potentially due to the increased volume in repair projects necessitated by the storm. Because the market is already struggling to provide enough skilled labor to meet the existing demand, we believe that there may be a risk of non-competitive bidding on multiple trades in 2018–2019, the time when the greatest surge in rebuilding activity is expected.

The following table summarizes the interview sentiments of local contractors in San Antonio by each major trade:

Trade

Outlook

Carpentry Cost for carpentry is expected to increase by 10-15% in the next year due to labor and material shortage.
Concrete Subs interviewed do not expect a shortage of supply, nor effects on workload and scheduling. Typical cost inflation of about 10% is expected for long-term.
Rebar There is a shortage in labor, but no specific impacts on rebar manufacturing. Materials are readily available with an expected inflation of 10% (usually towards the end of each calendar year).
Steel Labor shortage is expected to play a role in 2018; material is expected to follow normal price inflation. Overall, clients can expect a normal inflation of 10%.
Roofing Hailstorms in the coming spring would increase the workload in the short term. Material-wise, plywood would be one to keep an eye on. Overall, price and supply are expected to remain steady in the San Antonio market for the next year.
Interior Construction Labor shortage has been an issue and will worsen as rebuilding continues. Wages are expected to increase by 15 – 20% in the next two years. Material prices are expected to follow normal inflation at a rate around 10%.
Electrical The market has been busy, and the labor shortage is expected to cause longer lead times and price increase by 10-15% over the next three years.

Our Recommendations

We recommend that our clients take certain measures to prepare for these factors and develop a mitigation plan where possible. We suggest the following potential action items:

  1. Track General Contractor and Subcontractor Interest Early: Conduct market outreach to gauge the likely level of interest among general contractors and subcontractors within the major trades 3-6 months prior to bidding.
  2. Identify Similar Competing Projects: Understand which major projects within the local and regional markets are likely to be bidding at the same time.
  3. Structure Flexible Bid Packages: Prepare possible additive or deductive bid alternates that can be implemented should bids come in higher than expected.
  4. Reserve A Sufficient Bidding Contingency: Allot a possible bidding contingency built into the estimated construction cost (ECC) and/or estimated total project cost (ETPC).

Ongoing Research

These types of events can impact the construction industry abruptly and unpredictably, particularly when the market is in an accelerated mode. We’ve learned from Hurricane Katrina that most of the impacts will be felt within the first 18 months following a natural disaster, and so are continuing to track Harvey’s effects through ongoing outreach to the local contracting community.

In addition, we have been monitoring the recent wildfires in California and Hurricane Irma to gauge their impact in California and Florida, as well as understand how they may impact the national construction industry. Regular updates will be provided as further data is gathered and analyzed.

Please contact me through LinkedIn or the Contact page if you have any questions regarding our research.

Alternative Text

Rick Lloyd

Rick Lloyd serves as Vice President for MGAC's Cost & Risk Management Team. He brings over 28 years of experience in construction cost planning and estimating services on a wide range of domestic and international projects.
View other posts by

Login

Login to your account to view your Favorites and portfolio. If you don’t have an account, simply enter your email address to create a portfolio of your favorite projects, markets, services and team members.

Create an Account

Create an account to save your favorite projects, markets, services, people, and insights to create a custom landing page. To “favorite” content, simply click the + sign on the right corner.